Developing a Plan to Get Out of Debt Once and For All

Debt is one of the biggest problems facing Americans today. One reason it is so difficult is because it can be challenging to get out of debt once you find yourself buried in it. It is often paralyzing and prevents you from ever recovering. But, by developing a solid plan to get of debt, you will have a road map out of financial impairment and be well on your way to recovering from the possible financial devastation.

Calculate Your Total Debt

The most important aspect of getting out of debt is to fully understand exactly how much debt you are in. To do this, you need to add up the total amount you owe to each creditor so you have a tangible number to work with.

One easy way to summarize your total debt is to get a copy of your credit report. It will contain a list of your financial obligations to institutions who report to the major credit bureaus. There are a number of websites who offer free credit reports and make this a pretty simple process. To double check that all of your obligations are on the report, examine recent statements from your creditors to make sure your list is accurate. Also take into consideration any informal debts you might have, such as to friends or relatives, and add it to your total, as well.

Prioritize Your Debts

All debts are not created equal. For example, the mortgage you owe on your home is certainly not the same as the credit card debt you ran up over the holidays. When trying to determine which debts to pay off first, choose the one with the highest interest rate.

Or, another alternative to eliminate the sheer number of debts you have weighing you down is to pay the smallest debt off first. If your higher interest debts also have high balances, it can take years to pay one debt off. Smaller debts are repaid quicker and might be preferable to pay off first. Ultimately, however, you need to examine your unique debt situation and determine what is right for you.

Determine How Much You Can Pay

A thorough examination of your income is crucial to determine how much you can pay on your debt. This is not a situation where you want to find a few extra dollars. In fact, you will need to make some hard decisions to really work to pay down your debt. (Check out my last blog post, “Living Below Your Means- Can It Be Done?” for excellent ideas.)

Add up your earnings from your regular income. Subtract any essential money you must spend each month, including your mortgage or rent, utilities, food, medical expenses, as well as any current debt payments. The amount that is left is your disposable income, and a vast majority of it should go to pay down your debt obligations.

Create a Manageable Plan

Put all of the money you have allocated for debt reduction toward your highest priority debt, whether it is the largest interest rate or lowest debt. Don’t neglect any minimum payments on other debts, however. These should be considered more financial obligations, rather than debt reduction since the small amount does little to reduce the overall debt.

Once the first debt you targeted is paid off, move to the next one on your list. Use the extra amount you’ve allocated for the first debt and transfer it to that second debt. Continue with this cycle until each debt is paid off. This process can take years in many cases, but the benefits far outweighs the sacrifice of a few years.

It’s difficult to take any journey without an adequate road map. The same can be said for paying off debt. Without a full understanding of the problem and a way to alleviate the issue, it can seem nearly impossible to ever be in the black again. With some forethought and planning, however, getting out of debt truly is truly achievable with a great deal of persistence and patience.